How to Prevent Cash Flow Problems

If you are a small business owner then you may have experienced a cash flow shortage at one time or another. A number of things can cause a cash flow. Small businesses need cash to run the operations and to meet day to day obligations. Without the proper cash on hand a business can quickly go out of business.

When ever a business has a cash flow problem they are always looking for ways to correct the problem even if it is on a temporary basis. Some businesses will take out a business line of credit that they can draw upon when needed, if a cash flow problem develops. A line of credit can be used to meet day to day expenses. Eventually you will need to establish a regular cash flow, from business operations, or the line of credit could confound the problem.

One item that can cause a cash flow problem are outstanding receivables. As soon as a business starts to extend credit to it's customers there is the chance that someone will not pay on time or they may not pay at all. A small business must install an effective credit and collection system if they want to keep their delinquency down. When an account goes past due 30 days this is when collection activities should begin. The earlier you contact the customer, after delinquency, the easier it is to resolve the problem. Past due receivables represent cash flow, that could be used to purchase equipment, and meet payroll and other day to day expenses. There are some business owners that offer discounts if a customer pay early or within ten days.

It is not uncommon for a small business owner to finance large ticket items when they first open their business. Some of the things financed could be equipment, computers, furniture as well as other items needed to run a business. The problem with financing too many things early on is that most businesses don't realize a profit until three or four years down the line. A business owner has to make payments on loans, meet payroll and his other business expenses and obligations while the business is in operation. If a business owner over extends himself right at the beginning he is on a path that will lead to failure. Lack of cash flow is one of the primary reasons many businesses fail before they even get started. A business owner should always take it easy in the beginning and try to purchase only the necessities needed to run the business. As time progresses other purchases can be made.

There are many small business owners that don't understand accounting principles and functions. Every business owner should take managerial accounting, as well as principles of accounting 101 which will give them a better understanding of sales, revenues and expenses. When you have knowledge of accounting principles you will be able to recognize when there is an excessive amount of expenses for a given period. Small business owners should always look for ways to reduce or cut expenses when ever possible. Increasing sales revenue and reducing expenses will have a business have a healthy profit margin.

Small business owners should also pay their own debts as late as possible without incurring a penalty. The longer they can keep cash on hand for business operations the better. Sometimes it can be beneficial to pay on time if a discount is offered.

Source:
http://www.powerhomebiz.com/vol149/cashflow.htm

source:

http://www.powerhomebiz.com/vol17/cashflow.htm